Arm Holdings (NASDAQ: ARM) share price plunged despite the semiconductor company reporting robust revenue growth in the latest quarter. Investors were not happy with the company's guidance, as it just reiterated its full-year outlook while lowering its growth expectations for royalty revenue.
Despite the recent decline, the stock is still trading up nearly 51% this year. Despite that performance, it still trades down over 39% from an all-time high set in early July.
The question now is whether this recent drop presents a golden opportunity to buy the stock.
Huge revenue growth, but disappointing guidance
For its fiscal first quarter of 2025 ended in June, Arm Holdings' revenue surged 39% year over year to $939 million, which was well ahead of its revenue guidance of $875 million to $925 million. Adjusted earnings per share (EPS) soared 67% higher to $0.40 and was above the $0.32 to $0.36 it had forecast. License and other revenue soared 72% to $472 million. It signed two additional Arm Total Access agreements in the quarter, bringing the total to 33.
Royalty revenue, meanwhile, rose 17% year over year to $467 million driven by increased usage of its newer Armv9 technology in smartphones. Royalty revenue from smartphones jumped more than 50% year over year despite only a single-digit increase in units. It said it was starting to see increased adoption of Armv9-based server chips, as well.
Looking ahead, Arm kept its full-year guidance calling for adjusted EPS of $1.45 to $1.65 on revenue of $3.8 billion to $4.1 billion. However, it said it now expects royalty revenue to grow in the low 20% range, down from a prior outlook of mid-20% growth. This was due to inventory issues in the Industrial Internet of Things (IIoT) and networking segments. Analysts were looking for adjusted EPS of $1.58 on revenue of $4.0 billion.
For fiscal Q2, Arm forecast adjusted EPS of $0.23 to $0.27 and revenue of $780 million to $830 million. Analysts were looking for EPS of $0.27 and revenue of $804.1 million.
Management expects fiscal Q2 to be the low point of revenue due to the timing of revenue recognition from licensing, but one of its highest booking periods.
One of the big cautions with Arm is its valuation. Even after its recent sell-off, the stock trades at a forward price-to-earnings (P/E) ratio of nearly 77.
That's a large multiple for a company even with Arm's current strong revenue growth. When companies carry high valuation multiples, any indication that growth could come in slightly below expectations tends to lead to sell-offs.
Now working in Arm's favor is that its royalty and licensed-based business model is extremely attractive. The revenue it gets from royalties has a long tail, meaning that it tends to get paid for many, many years, in some instances even decades based on products that ship based on its designs. Meanwhile, its license subscription revenue brings a consistent revenue stream each year.
Arm also benefits from the higher royalty rates it is getting for newer designs, such as from its Armv9 architecture. It is also looking to make much bigger inroads into the PC market, with a goal of getting into 50% or more Windows-based units within the next five years. Apple previously moved all its computers to ARM-based chips years ago, so this goal does seem attainable, as PC makers try to emulate Macs.
Given its still lofty valuation, however, I'd probably let things settle for a bit before looking to jump into the semiconductor stock. Arm Holdings continues to have strong long-term prospects, but valuation does matter.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
Arm Holdings Shares Sink Despite Huge Revenue Growth. Is This a Golden Opportunity to Buy the Stock? was originally published by The Motley Fool